Liontrust Special Situations: Winning fund managers tests for shares that can beat the market whether it rises or falls

The Bank of England last week upgraded its previous forecasts for the economy, pointing to better than expected growth in GDP and a faster fall in inflation.

Meanwhile, the FTSE 100 index of leading shares continued its strong run. But Anthony Cross and Julian Fosh, who manage the Liontrust Special Situations Fund, are unmoved by economic indicators.

They operate a distinct approach to stock-picking, regardless of the direction of the wider market. Cross, who has managed the £996 million fund since its launch in 2005, and Fosh, who joined in 2008, seek long-term capital growth by identifying firms with what they call ‘economic advantage’.

Liontrust Special Situations Fund focus

Everything else is a distraction, they say. For a firm to make it to their list of holdings it must satisfy at least one of three criteria.

First, it must have intellectual property – the exclusive ownership of an idea or creation. Second is distribution – where a company has a strong network to sell a product. Finally, recurring revenues from repeat sales or servicing.

Firms that do not meet any of these criteria – for instance, banks – are shunned.

The fund is not limited by business size or sector. Instead, it invests freely across UK companies and measures itself against the FTSE All-Share Index.

Liontrust Special Situations Fund focus

By ignoring ‘panic driven’ market sentiment, Cross says they can protect the fund from volatility. ‘Unless there is a fundamental change to a business we are invested in, we buy and hold our positions for years rather than weeks or months,’ he says.

‘Due to the nature of the businesses in which we invest, we think they can consistently generate profit growth.’

Cross points to Diageo, one of the fund’s top holdings. The drinks group, whose brands include Smirnoff vodka, fell out of favour briefly in 2009 but went on to deliver excellent profits. The company’s products are popular in emerging markets and it has a strong distribution network.